The market for cryptocurrencies and digital blockchain assets has developed into a vibrant
ecosystem of investors, speculators, and traders, exchanging thousands  of blockchain assets.
Unfortunately, the sophistication of financial markets hasn’t followed: participants have little
capability of trading the time value of assets.
Interest rates fill the gap between people with surplus assets they can’t use, and people without
assets (that have a productive or investment use); trading the time value of assets benefits both
parties, and creates non-zero-sum wealth. For blockchain assets, two major flaws exist today:
● Borrowing mechanisms are extremely limited, which contributes to mispriced assets (e.g.
“scamcoins” with unfathomable valuations, because there’s no way to short them).
● Blockchain assets have negative yield, resulting from significant storage costs and risks (both
on-exchange and off-exchange), without natural interest rates to offset those costs. This
contributes to volatility, as holding is disincentivized.
Centralized exchanges (including Bitfinex, Poloniex...) allow customers to trade blockchain assets
on margin, with “borrowing markets” built into the exchange. These are trust-based systems (you
have to trust that the exchange won’t get hacked, abscond with your assets, or incorrectly close out
your position), are limited to certain customer groups, and limited to a small number of (the most
mainstream) assets. Finally, balances and positions are virtual; you can’t move a position on-chain,
for example to use borrowed Ether or tokens in a smart contract or ICO, making these facilities
inaccessible to dApps .
Peer to peer protocols facilitate collateralized and uncollateralized loans between market
participants directly. Unfortunately, decentralization forces significant costs and frictions onto
users; in every protocol reviewed, lenders are required to post, manage, and (in the event of
collateralized loans) supervise loan offers and active loans, and loan fulfillment is often slow &
asynchronous (loans have to be funded, which takes time) [3-6].
In this paper, we introduce a decentralized system for the frictionless borrowing of Ethereum
tokens without the flaws of existing approaches, enabling proper money markets to function, and
creating a safe positive-yield approach to storing assets.
2 The Compound Protocol
Compound is a protocol on the Ethereum blockchain that establishes money markets, which are
pools of assets with algorithmically derived interest rates, based on the supply and demand for the
asset. Suppliers (and borrowers) of an asset interact directly with the protocol, earning (and paying)
a floating interest rate, without having to negotiate terms such as maturity, interest rate, or
collateral with a peer or counterparty.